How Big Is the ‘Lemons’ Problem? Historical Evidence From French Appellation Wines

Abstract

We provide an empirical measure of the economic surplus loss arising from the failure of a competitive market to supply quality in the presence of asymmetric information. When consumers cannot observe product characteristics at the time of purchase, incentives for atomistic producers to supply costly quality may be suppressed. We use natural variation in wine prices across administrative districts around the enactment of pioneering regulations aimed at resolving asymmetric information problems in the French wine market to identify related welfare losses. Results from a panel analysis indicate large potential losses from the quality-related market failure, suggesting an important role for credible certification schemes.

Keywords: asymmetric information, quality uncertainty, wine, France, appellation

JEL Classification: D82, N54, Q18